Financial Statements Terra Brasis Resseguros S.A.

Transcription

1 Financial Statements Terra Brasis Resseguros S.A. December 31, 2013 with Independent Auditor s Report

2 Financial statements December 31, 2013 Contents Independent auditor s report on financial statements... 1 Audited financial statements Balance sheets... 3 Statements of operations... 5 Statements of comprehensive income... 6 Statements of changes in equity... 7 Cash flow statements... 8 Notes to financial statements... 9

3 Condomínio São Luiz Av. Presidente Juscelino Kubitschek, 1830 Torre I - 8º Andar - Itaim Bibi São Paulo - SP - Brasil Tel: (5511) ey.com.br A free translation from Portuguese into English of Independent Auditor s Report on Financial Statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board (IASB) Independent auditor s report on financial statements The Shareholders, Board of Directors and Officers Terra Brasis Resseguros S.A. São Paulo - SP We have audited the accompanying financial statements of Terra Brasis Resseguros S.A. ( Company ), which comprise the balance sheet as at December 31, 2013 and the related statements of operations, statements of changes in equity and cash flow statements for the year then ended, and a summary of significant accounting practices and other explanatory information. Management's responsibility for the financial statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting practices adopted in Brazil applicable to entities supervised by Brazil s Private Insurance Supervisory Office (SUSEP), and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Brazilian and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether these financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the Company s financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. An audit also includes evaluating the appropriateness of accounting practices used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 1 Uma empresa-membro da Ernst & Young Global Limited

4 Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the equity and financial position of Terra Brasis Resseguros S.A. as at December 31, 2013, its operating performance and cash flows for the year then ended, in accordance with accounting practices adopted in Brazil applicable to entities under Brazil s Private Insurance Supervisory Office (SUSEP) supervision. São Paulo, February 19, ERNST & YOUNG Auditores Independentes S.S. CRC-2SP015199/O-6 Patrícia di Paula da Silva Paz Accountant CRC-1SP198827/O-3 2

5 A free translation from Portuguese into English of Financial Statements prepared in Brazilian currency in accordance with accounting practices adopted in Brazil and International Financial Reporting Standards (IFRS), issued by International Accounting Standards Board (IASB) Terra Brasis Resseguros S.A. Balance sheets Note 12/31/ /31/2012 Assets Current assets 118, ,417 Cash and cash equivalents 4 1, Cash and banks 1, Short-term investments 5 97,348 97,152 Receivables from insurance and reinsurance operations 6 11,872 1,543 Insurance operations 11,616 1,496 Reinsurance operations Reinsurance and retrocession receivables - reserves ,224 3,132 Notes receivable and credits Notes receivable and credits Tax and social security credits Other receivables 5 4 Prepaid expenses Deferred acquisition costs Reinsurance Noncurrent assets 4,215 3,045 Long-term receivables 3,585 2,460 Receivables from insurance and reinsurance operations Insurance operations Notes receivable and credits 3,585 1,967 Tax and social security credits 7 3,585 1,967 Deferred acquisition costs Reinsurance operations - 79 Fixed assets Movables Other Intangible assets Other Total assets 123, ,462 3

6 Note 12/31/ /31/2012 Liabilities and equity Current liabilities 27,052 6,398 Accounts payable Liabilities payable Taxes and social charges payable Labor charges Taxes and contributions 35 - Debts from insurance and reinsurance operations 6 6,859 3,939 Insurance operations 8 - Reinsurance operations 6,298 3,670 Insurance and reinsurance brokers Third-party deposits Reserves - reinsurers ,161 1,571 Noncurrent liabilities Debts from insurance and reinsurance operations 6-83 Insurance and reinsurance brokers - 83 Reserves - reinsurer Equity 15 96,079 98,584 Capital 100, ,000 Capital reserves 1,600 1,600 Accumulated losses (5,521) (3,016) Total liabilities and equity 123, ,462 See accompanying notes. 4

7 Statements of operations Years ended (In thousands of reais, except earnings (loss) per share) Notas Written premiums 17a 17,710 2,021 Changes in reserves (10,156) (1,936) Earned premiums 7, Claims incurred 17b (6,980) (57) Acquisition costs 17c (739) (16) Loss on retrocession operations 17d (2,401) (541) Administrative expenses 17e (8,931) (5,162) Tax expenses 17f (542) (61) Financial income (expenses) 17g 7,670 4,137 Financial income 9,363 4,342 Financial expenses (1,693) (205) Equity pick-up Operating income (expenses) (4,097) (1,570) Income tax 1,003 1,220 Social contribution Profit sharing (27) - Net income (loss) for the year (2,505) 396 Number of shares - in thousands 100,000, ,000,000 Net earnings (loss) per thousand shares (25.05) 3.96 See accompanying notes. 5

8 Statements of comprehensive income Years ended Net income (loss) for the year (2,505) 396 Other comprehensive income - - (=) Comprehensive income (loss) for the year (2,505) 396 See accompanying notes. 6

9 Statements of changes in equity Years ended Capital Capital increase Capital reserve Retained earnings/(accumulated losses) Total Balance at December 31, ,000 1,445 - (3,412) 1,033 Future capital contribution - 1, ,500 Set-up of capital reserves - - 1,600-1,600 Capital increase (decrease) 97,000 (2,945) ,055 Net income (loss) for the year Balance at December 31, ,000-1,600 (3,016) 98,584 Net income (loss) for the year (2,505) (2,505) Balance at December 31, ,000-1,600 (5,521) 96,079 See accompanying notes. 7

10 Cash flow statements Years ended 12/31/ /31/2012 Operating activities Net income (loss) for the year (2,505) 396 Adjustments: Depreciation and amortization Changes in assets and liabilities Financial assets (196) (96,222) Receivables from insurance and reinsurance operations (9,915) (1,957) Reinsurance receivables (4,092) (3,133) Income and social security taxes (24) (66) Deferred tax assets (1,618) (1,966) Prepaid expenses (55) 6 Deferred acquisition costs (329) (340) Other assets (3) (10) Taxes and contributions Other payables (296) 479 Debts from insurance and reinsurance operations 2,837 4,023 Third-party deposits Reserves - insurance and reinsurance operations 17,193 1,968 Cash generated by operating activities 1,541 (96,607) Investing activities Payment for acquisition Investments (115) (24) Fixed assets (34) (373) Net cash used in investing activities (149) (397) Financing activities Capital increase - 95,555 Capital reserve - 1,600 Net cash flow from financing activities - 97,155 Net increase in cash and cash equivalents 1, Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year 1, See accompanying notes. 8

11 Notes to financial statements 1. Operations Terra Brasis Resseguros S.A. (hereinafter referred to as Terra Brasis or the Company ) is a privately-held corporation, with headquarters at Rua Minas da Prata, 30, suite 122, Itaim Bibi, São Paulo, Capital, enrolled under Brazilian IRS Registry of Legal Entities (CNPJ) No / Terra Brasis was incorporated as of September 20, 2010 as a service provider, for the purpose of becoming a local reinsurer. In 2011, still in its pre-operating stage, the Company developed systems and processes to structure its reinsurance operations. On October 4, 2012, Terra Brasis was authorized by Susep Administrative Ruling No to operate as a Local Reinsurer under the terms of article 2, item V of Brazil s National Council for Private Insurance (CNSP) Resolution No. 168/ Basis of preparation and presentation of financial statements a) Basis of preparation: The financial statements were prepared in accordance with the provisions of Susep Circular No 464/2013, which revoked Susep Circular No. 430/2012, taking effect retroactively as from January 1, Referred to circular had no significant impacts on Terra Brasis. These financial statements were also prepared in accordance with the technical pronouncements, guidelines, and interpretations issued by the Brazilian FASB (CPC) when called upon by Susep, and the rules of Brazil s National Private Insurance Council (CNSP), hereinafter referred to as accounting practices adopted in Brazil applicable to institutions authorized to operate by Susep. These financial statements were approved by the Board of Directors as of February 19, b) Comparability: The financial statements are presented including comparative information of the prior period, as set out by Technical Pronouncement CPC 26 - Presentation of Financial Statements, issued by the Brazilian FASB (CPC) and Susep Circular No. 464/2013. c) Going-concern considerations: Management evaluated the Terra Brasis ability to continue as a going concern and is satisfied that the Company has sufficient funds to continue in business for the foreseeable future. Additionally, management is not aware of any material uncertainty that may cast significant doubt upon the Company s ability to continue as a going concern. d) Functional and reporting currency: The financial statements are presented in Reais (R$), which is the functional currency of the Company. Unless otherwise stated, the information is expressed in thousands of Reais and rounded to next thousand. 9

12 2. Basis of preparation and presentation of the financial statements (Continued) e) Measurement basis: The financial statements were prepared under historical cost convention, saving the following significant items recognized in the balance sheet: i) Financial assets measured at fair value through profit or loss: ii) Financial assets available for sale are measured at fair value available; and iii) Reserves, measured in accordance with Susep rules. f) Use of estimates and judgments: Preparation of the financial statements in accordance with the standards approved by Susep requires that management record certain amounts of assets, liabilities, revenues, and expenses based on estimates, which are established based on judgments and assumptions as to future events. The actual settlement of transactions may differ from the aforementioned estimates due to the subjectivity inherent in their determination process. Estimates and assumptions are reviewed periodically. Reviews relating to accounting estimates are recognized in the period when performed and in any subsequent periods affected. Information on areas where the use of assumptions and estimates is significant for the financial statements and in which therefore there is a significant risk of material adjustment within the next year is included in the notes set out as under: Nota Financial instruments; Nota Written premiums; Note Reserves and Liability Adequacy Test (LAT); Note 6 - Insurance and reinsurance receivables and payables; Note 7 - Tax and social security credits. g) Segregation between current and noncurrent: Terra Brasis classifies its assets as current when the following criteria are met: They are expected to be realized or sold or used within the normal operating cycle (12 months) of the entity; and They are held primarily for the purpose of being traded. 10

13 2. Basis of preparation and presentation of the financial statements (Continued) h) Standards not yet in effect: Susep published Circulars No. 483/2014 and No. 474/2013, which will take effect in 2014 and 2015, respectively. Management analyzed these standards and believes that they will have no material impact. 3. Summary of significant accounting practices The significant accounting practices described below were applied consistently for all comparative periods presented in the financial statements Cash and cash equivalents These include cash in hand and bank accounts Financial instruments Terra Brasis classifies its financial assets into the following categories: (i) financial assets measured at fair value through profit or loss, (ii) financial assets held to maturity, (iii) financial assets available for sale, and (iv) receivables. Classification into these categories is determined by management upon initial recognition and depends on the strategic purpose for which the asset has been purchased. 3.2.a. Classification into categories i. Financial assets measured at fair value through profit or loss Financial assets are classified as measured at fair value through profit or loss when they are classified as held for trading and designated as such upon initial recognition. Terra Brasis manages these investments and makes buy and sell decisions based on fair value in accordance with Company risk management and investment strategies. These assets are measured at fair value and any changes thereto are recognized in P&L for the year. ii. Financial assets held to maturity Financial assets are classified into this category when management has a positive intent and ability to hold such investment securities to maturity. Held-to-maturity investments are stated at amortized cost less impairment. 11

14 3. Summary of significant accounting practices (Continued) 3.2. Financial instruments (Continued) 3.2.a Classification into categories (Continued) iii. Financial assets available for sale These financial assets are not classified into any of the abovementioned definitions. After their initial recognition, they are measured at fair value and any changes other than those arising from impairment are recorded through other comprehensive income, a component of equity. When an investment is written off, the accumulated result in other comprehensive income is transferred to the P&L for the year. iv. Receivables These consist substantially of receivables under reinsurance agreements that are periodically tested for impairment. If objective evidence indicates that an impairment loss has occurred, this loss is recognized in P&L for the year. 3.2.b Determination of fair value Fair values are estimated for measurement and/or disclosure purposes. When applicable, additional information on the assumptions used in estimating fair values are disclosed in the accompanying notes to the financial statements. 3.2.c Fair value hierarchy: The hierarchy related to fair value measurement is broken down into the following levels: Level 1 - Quoted prices (unadjusted) in active markets for identical assets; Level 2 - Classified when a discounted cash flow methodology or another asset pricing methodology based on market data is used and when all these data are observable in the open market; Level 3 - Asset which is not based on observable market data and the Company uses internal assumptions for determination of its methodology and classification. Terra Brasis presents all its investments classified into level 2. 12

15 3. Summary of significant accounting practices (Continued) 3.3. Written premiums Terra Brasis issues reinsurance contracts to provide cover to risks ceded by Insurance and Reinsurance Companies (Ceding Companies). Facultative reinsurance contracts are those in which the risk specifically assumed is ceded individually by and at the option of the Ceding Companies, whereas Automatic or Portfolio reinsurance contracts are those whereby the Ceding Company and Terra Brasis previously define the coverage types and conditions under which the risks will be automatically included within their terms. Contracts may be under Proportional Reinsurance system, when the original claims and premiums are divided up proportionally between Terra Brasis and the Ceding Company, or as NonProportional Reinsurance, also known as Excess of Loss Reinsurance, when Terra Brasis indemnifies the Ceding Company only against the amount of loss in excess of a specified retention and receives a premium from the Ceding Company, calculated specifically for such liability. Up to September 2013, premiums for policies in force but not issued (RVNE) were calculated based on the percentages set out in Susep Circular No. 448/2012, as Terra Brasis had not accumulated sufficient experience in order to make a better estimate. Since referred date, these premiums have been calculated under the Company s own methodology, in accordance with Brazil s National Council for Private Insurance (CNSP) rules, regulated by Susep. On account of this change, in October 2013, the RVNE amount, which would be R$2,209, was R$1,813, a decrease by R$396. Under Facultative Reinsurance Contracts, reinsurance premiums are fully recognized as of the formal acceptance date of the Contracts. Under Non-Proportional Automatic Reinsurance Contracts, reinsurance premiums are also fully accounted for as of the date on which the Contracts are recorded, based on the Premium Deposit, and are monitored over the life of the Contract and adjusted upon their termination. In the case of Proportional Automatic Reinsurance Contracts, reinsurance premiums are recorded monthly, based on estimates provided by the Ceding Company, so as to monitor the premiums written by the Ceding Company over time and in terms of value. The estimates are monitored over the life of the Contract and adjusted when updated information is received from the Ceding Company. 13

16 3. Summary of significant accounting practices (Continued) 3.3. Written premiums (Continued) Terra Brasis enters into Retrocession Agreements to increase its acceptance capacity, to cap responsibility up to its risk retention limit, and to mitigate the risk of significant losses from catastrophic events. Premiums ceded under Proportional Retrocession Agreements are recognized in consonance with the recording of acceptance premiums covered thereunder. Premiums under Non-Proportional Retrocession Agreements are fully recognized as of the date the Retrocession Agreement is ceded. Deferred acquisition costs are recorded in consonance with the same criteria used for premiums Earned premiums Under Facultative Contracts, premiums and the corresponding deferred acquisition costs are allocated to P&L on a daily pro rata basis, while the risks are in force. Under Proportional and NonProportional Automatic Risk Attaching Contracts (in which the risks underwritten over the life of the Contract remain covered during their full term), premiums and the corresponding deferred acquisition costs are allocated to P&L on a daily pro rata basis while the risks remain in force, according to information and estimates regarding average effective terms provided by the Ceding Companies. Under Non-Proportional Automatic Loss Occurring Contracts (in which losses occurring over the life of the Contract are covered), premiums and the corresponding deferred acquisition costs are allocated to P&L on a daily pro rata basis while the Contracts remain in force. For Retrocession Agreements, the same allocation principles apply to the premiums ceded. 14

17 3. Summary of significant accounting practices (Continued) 3.5. Fixed assets Fixed assets for own use include furniture and fixtures, and equipment for own used in the ordinary course of businesses and are stated at historical cost. Fixed assets are depreciated by the straight-line method over their estimated useful life: Assets group Estimated useful life (year) Annual depreciation (%) Furniture and fixtures Equipment Intangible assets Costs associated with acquisition of software programs are recorded as assets and amortized over their useful life, not to exceed five years. In-house is recognized as expenses for the period Accounts payable Accounts payable are liabilities payable for goods or services acquired from suppliers in the ordinary course of business, classified under current liabilities if their payment falls due within one year Reserves and Liability Adequacy Test (LAT) Reserves are recorded in accordance with the provisions and criteria established by CNSP and Susep. The Unearned Premium Reserve (PPNG) consists of the proportional part of reinsurance premiums in force, calculated on a daily pro rata basis, corresponding to the risk coverage not yet expired, which is determined for each type of Contract based on information or estimates, using the same criteria used to allocate premiums to P&L. The Unearned Premium Reserve for Policies in Force But Not Issued (PPNG-RVNE) is set up in order to calculate the unearned premiums related to reinsurance contracts not issued, in accordance with the criteria established in the Actuarial Note and Susep Circular No. 462/

18 3. Summary of significant accounting practices (Continued) 3.8. Reserves and Liability Adequacy Test (LAT) (Continued) The provision for technical surplus (PET) is set up according to the criteria established in specific clauses of the reinsurance contracts, which provide for a profit commission for Ceding companies. The Outstanding Claims Reserve (PSL) is set up to cover amounts payable referring to claims reported up to the financial statements date. The Reserve for Claims Incurred But Not Reported (IBNR) is set up based on actuarial calculations which consider the estimated final loss less claims already reported up to the financial statementsdate. Retrocession liabilities consist of premiums payable, consistently measured with the amount of reinsurance assets to the extent they are retroceded. Susep Circular No. 462/2013, which introduced changes to the method for calculating and the procedures for recording reserves, did not have any impact on Terra Brasis financial statements. In accordance with Accounting Pronouncement CPC 11 - Insurance Contracts, issued by the Brazilian FASB (CPC), at each balance sheet date a liability adequacy test is to be applied on all contracts in force on the test date. Book value considered for this test purposes are all reinsurance liabilities less deferred acquisition costs and intangible assets directly related to reinsurance contracts. The Liability Adequacy Test (LAT) was prepared in accordance with Susep Circular No. 457/2012 and was applied on the reinsurance contracts in force at December 31, This test was based on the book value of reserves at the base date less deferred acquisition costs. This amount was compared to the present value of the estimated cash flows of the obligations generated by the contracts in force. Cash flows were adjusted to present value based on the forward structure of the risk-free, fixed interest rate (ETTJ), defined by Susep for each contract index. The LAT results showed that the reserves currently recorded are sufficient to satisfy all the obligations arising from the contracts in force as of December 31, Therefore, there is no need for an Additional Premium Reserve (PCC) referring to any PPNG insufficiencies, or to supplement other reserves. 16

19 3. Summary of significant accounting practices (Continued) 3.9. Income and social contribution taxes Income tax is calculated at a rate of 15%, plus a 10% surtax on taxable profit exceeding R$ 240 thousand, whereas social contribution tax is computed at a rate of 15% on taxable profit. Income and social contribution tax expenses comprise current and deferred income taxes. Current and deferred taxes are recognized in the income statement unless they are related to items recognized directly in equity or in other comprehensive income. Deferred taxes are recognized on temporary differences between the book value of assets and liabilities for accounting purposes and corresponding values used for collection purposes (current taxes). Deferred taxes are measured at the rates expected to be applied to temporary differences when these become deductible, based on the rates in force at the reporting date of the financial statements. Deferred income and social contribution tax assets are recognized on tax losses, tax credits, and temporarily nondeductible differences and to the extent that it is probable that future taxable profit will be available, and may be used for offsetting purposes.deferred income and social contribution tax assets are reviewed monthly and reduced to the extent that their realization is no longer probable PIS and COFINS The Contribution Taxes on Gross Revenue for Social Integration Program (PIS) and for Social Security Financing (COFINS) are accrued at the rates of 0.65% and 4%, respectively, pursuant to current legislation. 4. Cash and cash equivalents In 2013, cash in hand is R$1. Bank account balances break down as R$390 in checking accounts in local currency and an amount equivalent to R$1,197 in a checking account in foreign currency, as follows: Cash and cash equivalents 12/31/ /31/2012 Cash 1 - Banks 1, Total 1,

20 5. Investments 5.1. Breakdown of investments Financial assets measured at fair value through profit or loss are as follows: No defined maturity 12/31/ /31/2012 Book value / market value Book value / market value DI referenced investment funds Brasil Plural yield fi DI referenced - 9,366 Itaú soberano - 10,391 Itaú restec tprf 11,382-11,382 19,757 Fixed income funds Plural Capital high yield rf crédito privado 29,787 45,022 Brasil Plural crédito corporativo fic fim 23,757 Brasil Plural crédito corporativo ii fic fim cp 1,026-54,570 45,022 Multimarket investment funds Brasil Plural equity hedge fic fim 16,395 21,060 Brasil Plural institucional fic fim 7,959 6,282 24,354 27,342 Equity funds Brasil Plural fic de fi ações 3,199 5,031 3,199 5,031 Real State funds Fii Brasil Plural absoluto fundo de fundos 2,893-2,893 - Foreign Exchange funds Itaú hedge cambial ficfi Total 97,348 97, Changes in investments 12/31/ /31/2012 Opening balance 97, Investments 1,238 97,020 Redemptions (8,712) (4,935) Yields 7,670 4,137 Closing balance 97,348 97,152 18

21 5. Investments (Continued) 5.2. Changes in investments (Continued) The fair value of investment fund shares was determined based on the share value reported by the administrators of investment funds in which Terra Brasis invests. Financial instruments are recognized in the investment fund portfolio. Terra Brasis is not engaged in any transactions with derivatives as ofdecember 31, All the funds in which Terra Brasis invests are nonexclusive, and respective data is available for public reference and open to other investors Performance Management measures the profitability of Company investments based on the Interbank Deposit Certificate (CDI) variation. The overall performance of the financial assets which comprise Company investment portfolio reached 8.44% in the period from January to December 2013, representing approximately 105% of CDI, which was 8.06% for the year. 6. Insurance and reinsurance receivables and payables 6.1. Breakdown Group Receivables Payables 12/31/ /31/ /31/ /31/2012 Property 5, ,561 1,835 Special risks Civil liability 1,151 1,414 1, Automobile Transport 1, ,410 1,379 Financial risks 1, Life - group Homeowners Rural Maritime Aviation Total 11,872 1,957 6,859 4,022 19

22 6. Insurance and reinsurance receivables and payables(continued) 6.2. Realization flow of premiums receivable and payable 6.2.a Receivable turnover 12/31/ /31/2012 Falling due Overdue Total Falling due Overdue Total 1 to 30 days 2, , to 60 days 1, , to 120 days 1, , to 180 days to 365 days 5, , Over 365 days Total 10, ,872 1,957 1, b Payable turnover 12/31/ /31/2012 Falling due Overdue Total Falling due Overdue Total 1 to 30 days to 60 days 2, , to 120 days 1, , to 180 days to 365 days 1,793-1,793 1,797-1,797 Over 365 days Total 6, ,859 4,022-4, Tax and social security credits 12/31/ /31/2012 Variação Current Tax and social security credits Noncurrent 3,585 1,966 1,619 Income tax credits - deferred 2, ,003 Social contribution tax credits - deferred 1, Total 3,705 2,062 1,643 Deferred income tax and social contribution credits are recorded on tax losses computed in each period. The balance of R$1,619 refers to credits originated in 2013, first year throughout which Terra Brasis carried out reinsurance activities, and the other credits (R$1,966) in years before its pre-operating phase. Based on Company business plan in effect, management estimates that the tax credits will be offset within five years from commencement of operations. 20

23 7. Tax and social security credits (Continued) Deferred tax credits arising from income tax and social contribution losses are recognized only to the extent that future taxable profit is likely to be available against which tax losses can be offset. Deferred tax credits on temporary additions, deriving from adjustments between tax and accounting records, are also recognized. Management s professional judgment is required so as to determine the deferred tax assets amount to be recognized based on probable terms and future taxable profit levels. 8. Fixed and intangible assets At December 31, 2013 Furniture and fixtures Equipment Software Total Opening balance Acquisitions Accumulated depreciation (41) (37) (26) (104) Closing balance At December 31, 2012 Opening balance Acquisitions Accumulated depreciation (7) (14) (5) (26) Closing balance Transactions with related parties Terra Brasis has investments in open-end funds managed by Brasil Plural Gestão de Recursos Ltda., a company belonging Brasil Plural financial group, one of its shareholders, as stated in Note 5. Key management personnel compensation in the period amounted to R$1,888 (R$ 1,192 in 2012), substantially comprised of management fees. At December 31, 2013, Terra Brasis had no other balances or transactions with its related parties. 10. Third-party deposits At December 31, 2013, third-party deposits, originated between 1 and 30 days, amount to R$355 and refer to prepayments of reinsurance installments, which will be regularized. 21

24 11. Description of Adjusted Equity (PLA), minimum required capital and solvency margin 12/31/ /31/2012 Equity 96,079 98,584 Prepaid expenses not related to reinsurance operations (18) (11) Tax credits (3,585) (2,062) Intangible assets (276) (187) a. Adjusted equity (PLA) 92,200 96,324 b. Base Capital 60,000 60,000 c. Risk capital 12,966 9,381 Portion Based on Underwriting Risk 2,020 5,487 Portion Based on Credit Risk 10,844 5,345 Portion Based on Operational Risk Portion Based on Market Risk - - d. Capital requirement (2012 = b+c; 2013 = max[b,c]) 60,000 69,381 e. Capital sufficiency (a -d) 32,200 26,943 Capital sufficiency (e/d) 54% 39% Terra Brasis calculated minimum required capital (MRC) as at December 31, 2013, using the formulas and criteria according to the relevant legislation. While in 2012 risk capital was added to base capital, in 2013 minimum required capital began to be calculated as the higher of these amounts, in accordance with CNSP Resolution No. 302/2013. Terra Brasis showed to have full capital sufficiency in relation to adjusted equity. 12. Reserves and deferred acquisition costs Reinsurance and retrocessions accepted 12/31/2013 Unearned premiums reserve (PPGN) Claims reserve Other Group Issued Policies in force but not issued (RVNE) Commission to ceding company Claims Incurred But Not Reported (IBNR) Reported Provision for technical surplus Provision for related expenses (IBNR) Total Property 5, (1,220) - 3, ,752 Special risks (4) Civil liability 1, (41) ,320 Automobile (123) Transport 1, (206) - 1, ,996 Financial risks 2, (758) ,907 Life - group Homeowners 31 4 (11) Rural (32) Maritime (1) ,945 Aviation (15) Gross reserves 12,630 2,195 (2,411) 1,411 5, ,161 22

25 12. Reserves and deferred acquisition costs (Continued) Reinsurance and retrocessions accepted (Continued) Group Issued 12/31/2012 Unearned premiums reserve (PPNG) Claims reserve Other Policies in force but not issued (RVNE) Commission to ceding company Claims Incurred But Not Reported (IBNR) Reported Provision for technical surplus Provision for related expenses (IBNR) Total Property (12) Civil liability 1, ,392 Financial risks 65 - (19) Maritime Gross reserves 1,942 - (31) , Retrocessions ceded Group Issued 12/31/2013 Unearned premiums reserve (PPGN) Claims reserve Other Policies in force but not issued (RVNE) Commission to ceding company Claims Incurred But Not Reported (IBNR) Reported Provision for technical surplus Provision for related expenses (IBNR) Total Property 3, (646) - 1, ,217 Civil liability (35) ,324 Automobile (127) Transport 1, ,132 Life - group 24 5 (1) Homeowners 2 1 (1) Retrocession companies 5, (810) 707 1, ,224 Group Issued 12/31/2012 Unearned premiums reserve (PPNG) Claims reserve Other Policies in force but not issued (RVNE) Commission to ceding company Claims Incurred But Not Reported (IBNR) Reported Provision for technical surplus Provision for related expenses (IBNR) Property 1,511 - (29) ,484 Civil liability (153) Transport 1, ,149 Retrocession companies 3,275 - (182) ,132 Total 23

26 12. Reserves and deferred acquisition costs (Continued) Deferred acquisition costs (brokerage) Group 12/31/ /31/2012 Property Special risks 30 - Civil liability Automobile 1 - Transport 85 - Financial risks 25 - Rural 2 - Maritime Aviation 3 - Total Coverage of reserves Reserves are guaranteed by investment fund shares amounting to R$12,733 held by the Company. This amount exceeds the R$8,562 coverage required, calculated under the rules set out in CNSP Resolution No. 226/2010 (article 13, as amended by CNSP Resolution No. 277/2013). Guarantee for reserves 12/31/ /31/2012 Reserves 19,161 1,968 Reinsurance assets (10,599) (1,911) Amount to be guaranteed 8, Investment fund shares 12, Guarantee fpr reserves 12, Sufficiency 4,

27 14. Business lines Major business lines, loss ratios and commission rates are as follows: Group 12/31/ /31/2012 Premiums Brokerage Premiums earned Loss ratio % (%) earned Loss ratio % Brokerage (%) Property 3, Special risks Civil liability 1, Automobile Transport Financial risks Life - group Homeowners Rural Maritime 1, Aviation Total 7, Equity Capital Fully subscribed and paid-in capital is represented by 100,000,000 common shares with no par value Capital reserve This refers to capital contributions voluntarily made by shareholders for the purpose of increasing equity. 16. Risk management policies These are defined as the process of identifying risks in order to maintain losses within predetermined tolerance limits. Terra Brasis has a risk management system, based on the integrated management of each of its business processes, adequacy of risk exposure level to predetermined objectives and alignment of all processes to the regulations currently in force. The risk management process relies on participation of all the levels within the corporate governance scope, from key management to the diverse business and product areas, in the identification, treatment and monitoring of these risks. Company risk management structure comprises the Chief Risk Office, Internal Controls, Internal Audit Area and Investment Committee. 25

28 16. Risk management policies (Continued) Underwriting risk Underwriting risk is defined as the risk of lower than expected underwriting results on reinsurance activities. To standardize and guarantee the quality of the risks assumed, Underwriting Guidelines were created for each business line. Compliance with the requirements contained in these guidelines is checked on an ongoing basis and changes are made whenever necessary. Risk retention was defined between 1.5% and 4.0% of Terra Brasis capital, a conservative percentage compared with the local reinsurance market and international practices. Proportional and nonproportional retrocession agreements were acquired for certain business lines, increasing gross risk acceptance capacity while reducing the expected portfolio volatility. Significant efforts are endeavored to control unknown accumulation. More specifically, what is monitored, to the maximum extent possible, is the exposure of Terra Brasis to any inforce coinsurance deals between the ceding companies with which Terra Brasis has entered into reinsurance contracts. For Surety Bonds, a control over accumulation by principal is in place Credit risk Credit risk is the risk that a counterparty may fail to perform a financial obligation to Terra Brasis. Retrocession receivables constitute the major source of credit risk. To mitigate this risk, our retrocession base is distributed across geographic regions, with companies based in England, Continental Europe, Bermuda, the United States and in emerging markets. The global classification and rating of each of our retrocession partners are as follows: Rating (global classification) Retrocession companies AM Best S&P/Fitch Moody s Local 1 AA Admitted 1(*) A A+ Admitted 2 A+ A+ A2 Admitted 3 A A+ A1 Admitted 4 A+ AA- Occasional 1 A Occasional 2 A- Occasional 3 BBB+ (*) 14 Lloyd s syndicates 26

29 16. Risk management policies (Continued) Liquidity Risk Liquidity risk is the risk of an entity facing difficulties in meeting its financial obligations within the maturity dates and in the amounts required. The risk management policy adopted by Terra Brasis includes no liquidity risk tolerance or limits. The Company is committed to honoring its insurance or financial obligations upon maturity thereof or when the claims satisfy all the criteria for immediate settlement. In order to achieve this objective, Terra Brasis manages its liquidity requirements on a continuous basis. In order to support liquidity management, the Company s investment policy sets out that a minimum 20% of the investment portfolio or a minimum 50% of the coverage requirements of technical reserves by pledged assets, whichever is higher, is to be applied in redemption assets within three days (D+3) Operational risk Operational risk is defined as the risk of loss arising from failure, weakness or inadequacy in internal processes, human behavior, or from outside events. With the support of the Internal Control area and following Susep guidelines, Terra Brasis is able to monitor, identify and mitigate these risks, aiming at ensuring business continuity in emergency situations, disasters or catastrophic events Market Risk Market risk is the risk of financial losses resulting from changes in prices and financial market rates. For investment portfolio assets, this risk is measured using the Value at Risk (VaR) method. Observing the one-year portfolio s history, at December 31, 2013, Terra Brasis potential loss is estimated at R$264 with a confidence level of 97.5%, which corresponds to 0.27% of the portfolio s net worth. As of June 30, 2013, this metric was R$319, which corresponded to 0.33% of the portfolio s net worth. For currency risk management purposes, Terra Brasis monthly reviews the balances of its foreign currency-linked assets and liabilities and uses financial instruments to minimize currency mismatch risk. At December 31, 2013, the Company was exposed solely to US dollar-related risks, with total assets linked to this currency amounting to R$6,806, total liabilities amounting to R$6,829, which resulted in net liability exposure of R$23. 27

30 16. Risk management policies (Continued) Sensitivity analysis The objective of sensitivity analyses is to assess the impact on P&L arising from changes in actuarial and market assumptions. A sensitivity analysis was performed in the liability adequacy test (LAT). This analysis comprised in measuring the impacts of changes in theparameters on the reserves sufficiency test. Reserve sufficiency was not compromised. Some sensitivity analysis results are as follows: Impact - (thousands of Impact on net income and equity 12/31/ /31/2012 Impact - (thousands of Reais) Impact (%) Actuarial Assumptions Reais) Impact (%) Loss ratio - 10% higher (576) (0.6) Loss ratio - 10% lower (156) (0.2) Interest rate - 10% higher (4) - Interest rate - 10% lower (56) (0.1) (156) (0.2) 28

31 17. Breakdown of P&L accounts 12/31/ /31/2012 a) Net written premiums Reinsurance premiums 15,210 1,974 Policies in force but not issued (RVNE) 2,195 Retrocessions accepted Retrocessions accepted 17,710 2,021 Changes in reserves (10,156) (1,936) Total 7, b) Claims incurred Claims (5,487) - Changes in reserve for claims incurred but not reported (1,493) (57) Total (6,980) (57) c) Acquisition cost Brokerage expenses (1,011) (361) Changes in brokerage expenses Total (739) (16) d) Retrocession income/(expenses) Income from retrocession operations 2, Expense with retrocession operations (4,492) (580) Total (2,401) (541) e) Administrative expenses Personnel and social charges (5,749) (3,944) Third-party services (1,504) (592) Location and operation (1,410) (550) Advertising and promotion (127) (22) Publications (81) (25) Donations and contributions (18) (14) Other administrative expenses (42) (15) Total (8,931) (5,162) f) Tax expenses Susep inspection charge (194) (49) Federal taxes (121) (1) Municipal taxes (36) (7) Workers' Union Dues (31) (3) Contribution on reinsurance operations (160) - Total (542) (61) g) Financial income/(expenses) Income: Income from equity securities Reinsurance operations foreign exchange fluctuation 1, Income from Investment fund shares assets not pledged in guarantee 7,173 4,193 Income from Investment fund shares assets pledged in guarantee Occasional financial income 4 6 Total 9,363 4,342 Expenses: Reinsurance operations foreign exchange fluctuation (1,615) (135) Interest expenses (1) (1) Expenses with Tax on Financial Transactions (IOF) (1) (58) Occasional financial expenses - custody rate (76) (11) Total (1,693) (205) 0 Total 7,670 4,137 29

32 18. Other information a) Retrocession premiums ceded in the period amounted to R$6,503, 14% of which referred to Local Reinsurers, 82% to Admitted Reinsurers and 4% to Occasional Reinsurers. b) Terra Brasis is party to no legal proceedings. 30